Tax simplification, end of distortions, efficiency: the objectives of tax reform

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After 30 years of discussions in successive governments and in Congress, reform is about to come to fruition. Tax burden should remain the same, but the government hopes to correct waste in the system. After 30 years of discussions in Congress and successive governments, the conclusion of the tax reform was forwarded this Friday (15) in the Chamber. The deputies approved in the first round the text that had already passed through the Chamber itself, was modified by the Senate and returned to the Chamber for analysis. This first stage of the reform deals with taxes charged on consumption, that is, those paid at the time of purchase. The government still wants, in the future, to modify the income tax collection model. In general terms, the reform that is being completed unifies taxes on consumption into a Value Added Tax (VAT). The VAT will be dual: one for state taxes, the other for federal taxes. The VAT rate has not yet been defined, but it should be around 25%, one of the highest in the world. With the reform, the government does not seek to reduce or increase the tax burden in force in the country. It will remain the same. The difference, according to the text’s defenders, is that the model will become simpler, charging will be more efficient and companies’ waste will be less. This is because, today, the Brazilian tax model is considered chaotic and generates distortions. Tax reform: Chamber approves basic text in 1st round The result of the improvement that will come with the reform, according to the government, is that in the medium term companies will be able to save more and pass on fewer costs to products, which would benefit producers and consumers and would contribute to economic growth. See below some of the main objectives of the reform: Tax simplification The proposal introduces Value Added Tax (VAT) into the national tax system. According to the text, five taxes that exist today will be replaced by two VATs: ▶️ Three federal taxes (PIS, Cofins and IPI) give rise to the Contribution on Goods and Services (CBS), under federal jurisdiction; ▶️ ICMS (state) and ISS (municipal) will be unified in the format of the Tax on Goods and Services (IBS), with management shared between states and municipalities. In the VAT model, taxes are not cumulative throughout the production chain of an item. Example: when the trader buys a shoe from the factory, he only pays tax on the value that was added at the factory. For example, you do not pay tax on the raw material that gave rise to the shoe – the factory will have already paid when purchasing the material from the rural producer. The value of VAT will still be stipulated in a PEC regulation. The economic area calculates that it should be something around 27.5% of the value of the product, to maintain the country’s current tax burden — neither increasing nor decreasing. Furthermore, taxes will now be charged at the final destination, where the good or service will be consumed, and no longer at its origin. This would help to combat the so-called “fiscal war”, the name given to the dispute between states so that companies can set up shop in their territories. End of distortions One of the most costly distortions for the economy is the “travel” of products across the country, a consequence of current tax rules. Today, ICMS, a state tax, is charged at origin. In other words, where the goods are produced. This creates the so-called “presumed credit” when a product leaves one state for another, reducing the value and being paid in ICMS. Through this model, some companies obtain tax benefits just because the products pass through certain states, even if no deliveries are made there. The result is trucks circulating unnecessarily on the highways, wearing down the asphalt and polluting the environment, increasing the total cost of the Brazilian economy. An even bigger distortion is when companies just send invoices to obtain the tax benefit, without the products even circulating through the states that grant the benefits. “For some companies, the merchandise goes to that state and, from there, goes to the final destination. Or it doesn’t even go there, there is an exit invoice from that state and from that state to another. These are triangular operations, the product passes through a certain state to have some tax benefit, which is generally a presumed credit. That’s why it’s called a tour”, explained Melina Rocha, former consultant at the World Bank and specialist in VAT. Furthermore, each state can define its tax rate, which generates competition between them, the so-called tax war. With the tax reform, taxes will be charged at the final destination, where the good or service will be consumed, after a transition period, and no longer at the origin. This would help to combat the so-called tax war. Congress needs to approve Tax Reform later this year, says Gerson Camarotti With the end of the fiscal war, production tends to be closer to places of consumption over time. However, some goods will still continue to be made in more distant locations to maintain, for example, the Manaus Free Trade Zone (ZFM). The site concentrates the production, for example, of motorcycles, smartphones, TVs, air conditioners and notebooks. Greater efficiency of the model In the current system, taxes are charged “inside” other taxes. For example, the state ICMS is levied on the ICMS itself and also on PIS/Cofins. This means that there are taxes embedded in prices that serve as a basis for charging other taxes, which increases the total value of goods and services and makes it difficult to calculate the tax being paid. The special secretary for tax reform at the Ministry of Finance, Bernard Appy, explained that only Brazil, together with Bolivia, charges tax on the price of products and services “inside”. With the tax reform, it was defined that there will no longer be the possibility of taxes being levied on taxes. The only exception will be the selective tax, levied on alcoholic beverages, cigarettes, weapons and the extraction of oil and minerals (so as not to create distortions in the market).

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